Low interest rates may not last, Marc Carney warns investors

25 Jan 2015 | Author: | No comments yet »

Bank of England governor warns ECB over quantitative easing risks.

Inflation dipped to a record-equalling low of 0.5 per cent in December, largely because of low oil prices, sparking fears that the UK could enter a period of deflation, which many economists believe would be damaging. The governor of the Bank of England told the last day of the Davos meeting of the World Economic Forum that he could receive daily risk positions of the banks to monitor any stresses in the system as he admitted persistently low interest rate environments could cause investors to take risks.

It’s as if suddenly the backroom boys and girls whose job it is to keep our financial system sound have come out of the phone booth dressed as Superman. The move by the European Central Bank to buy €60bn of government bonds and corporate debt announced on Thursday dominated much of the discussing during the four-day meeting in the alpine ski resort and comes after central banks in the US and the UK have also taken similar steps to stimulate economies. “In an environment of low interest rates and quantative easing there can be excessive risk-taking,” he said.

Mr Carney has gained a reputation for making statements that have moved markets more into line with his expectations, often leading to big changes in interest rate futures prices. A sense of responsibility is needed.” He did not name any companies, but recent analysis revealed that in 2012 seven US technology giants paid £54 million in British corporate tax, despite sales of £9.6 billion. In a session on the world economy, Mr Carney stopped to comment specifically on Britain. “One word on the UK,” he said, “is that we have a very low inflation environment right now largely caused by commodity prices and an ability to look through that.

The MSCI World Index has climbed almost 50 percent since the start of 2010 and bond yields have slid worldwide. “QE creates in some markets some distortions,” said BlackRock Inc. Known as quantitative easing (QE), the ECB will buy ¤60bn of bonds a month from banks, which effectively increases the money supply, keeps interest rates low, and encourages spending. The BoE’s views on low inflation being temporary — with a chance of turning negative before any recovery — implies that the Monetary Policy Committee is considering a modest rise in interest rates earlier than investors expect. However, he warned that QE has to be watched carefully, as traders and governments might take the sort of financial risks that caused the global economic crisis.

We are winning that race against unemployment.” He is also facing questions about the low rate of inflation in the UK, which has fallen below the 2% target rate set by the government, sliding to 0.5% in December. “We have the responsibility, we have the means and the will to do it and return inflation back to target within the two year horizon so people can rely on that.” Mr Carney added that with unemployment falling below 6 per cent, Britain was winning the race against the risks that the 2008 financial crisis had created a lost generation of unemployed. The International Monetary Fund this week made the steepest cut to its global-growth outlook in three years, reducing its forecast for 2015 to 3.5 percent from 3.8 percent in October. But even there, the role has been more that of a quiet aristocracy or high priesthood, murmuring riddles that their acolytes in the business press interpret for the adept. Also in Davos yesterday, the president of global investment bank Goldman Sachs warned that the financial services industry could leave London if the UK leaves the European Union.

Warming to his theme, the central bank governor indicated that the MPC was more optimistic than the markets about its ability to help inflation return to its 2 per cent target. “It is not lost on us that wages are picking up now in the most recent data and [are] consistent with our expectations,” he said. Pessimism “is a bit exaggerated,” said Kuroda. “By making this big decision the euro zone could recover strongly and deflationary pressures could be eradicated. That would be great for the global economy.” Carney said he was “cautiously optimistic about the global outlook,” pointing to the U.S. recovery and the possibility that oil could be “lower for longer.” He said there was a “big difference” in the path of monetary policy implied by the Federal Reserve’s forecasts and that anticipated by markets. Of course everyone in the central banking brotherhood quickly learned the disadvantages of that once he became perilously close to turning himself and his family into a page one tabloid star.

If voters decide to leave the EU – the Conservatives have promised a referendum on the issue if they win the general election in May – banks might come under pressure from clients on the continent to relocate, he said Britain’s economy relies heavily on financial and related professional services. At the time of the last forecast in November, the BoE based its forecast on the assumption that the first interest rate rise would take place in October 2015, which Mr Carney indicated at the time was a sensible assumption.

Coeure explained the ECB’s embrace of further stimulus by noting weakening prospects for inflation and said governments now had a responsibility to overhaul their economies. On emerging markets, Fink said while the “marketplace is starting to lose its patience” with them, he viewed the recent decline in sentiment toward developing nations as an opportunity to invest in some places, such as Brazil. To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net To contact the editors responsible for this story: Andrew J. During the patching up after the financial crisis of 2008, central bankers have been wary of doing anything that would put nervous markets to flight. “Forward guidance” became the new policy, as the central bankers signalled what they would do in future, reassuring markets that any action would be slow and expected.

But in October of last year, Poloz abandoned the forward guidance principle, calling it “addictive.” But besides being addictive, it weakens the impact of any central bank move. Sudden moves like those of Poloz and Jordan shocked traders who were complacently betting that the Canadian dollar and the franc would maintain their relationship, respectively, with the U.S. dollar and euro. In Canada, the country is also split as Prime Minister Harper’s favourite child, the oil producing west, is superseded by the ugly sisters of the industrial east.

All of which only make you nervous about what Bank of England’s Carney and the Fed’s Janet Yellen are planning to surprise us with at their announcements over the next two weeks.

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